ISET Khachpuri Index captures greater market integration!

The FINANCIAL -- In August 2016, the average cost of cooking one standard Imeretian khachapuri increased to 3.15 GEL, which is 4.8 % higher month-on-month (m/m, that is compared to July 2016), but 9.6% lower year-on-year (y/y, compared to August 2015).

The most interesting finding emerging from the August data concerns price dispersion across Georgia’s major cities. Our data come from Batumi, Kutaisi, Tbilisi and Telavi, and, as is easy to see on the chart, not only are prices in all locations moving in tandem over time (this is nothing unusual), but also the gap between the cheapest and the most expensive cities (for khachapuri lovers, that is) reached an all-time minimum of 10-15 tetri per one khachapuri portion. This is far lower than the 40-50 tetri gap we have been observing through much of the Khachapuri Index history.

Why is this an important finding? Price conversion across space is a key indicator of economic development. The fact that prices for the same food products become more or less equal in different cities suggests that Georgia as a whole is becoming a single, well-integrated market. And an integrated market is a boon for everybody. In an integrated market, both consumers and producers benefit from lesser price fluctuations and fewer interruptions to the supply and sales of food and other products.

Incidentally, road infrastructure and market integration were the subject of a recent presentation by the Georgian PM, Giorgi Kvirikashvili. Indeed, the simplest way to promote market integration is to build better roads, reducing the cost of transportation from one market segment to another. Yet, improved road infrastructure is not a sufficient condition for full market integration. Once physical infrastructure is there, Georgia will also need an effective trade network spanning the entire country: a network of interconnected logistics, distribution, wholesale and retail operators able to quickly react to changes in local demand and supply conditions. Something to worry about in the future.